11/19/2010 @ 12:30PM

How Europe Destroys Entrepreneurship

On July 1, 2010, I found that my bank account had been decimated. It must be a mistake, I thought, given that my new employer, IE Business School, had deposited my paycheck. I called the bank praying for enlightenment, but the teller simply droned on telling me to stop by the next day.

Nineteen hours, two packs of cigarettes, one bottle of wine and a pittance of sleep later, I scurried to the bank. The Spanish government, holding me personally liable for social security payments related to my first startup, a real estate agency, had wiped out my account. Seems the concept of “limited liability” had been lost in translation. I had poured my and some of my parents’ savings into the failed business. I had employed six Spaniards and honestly thought I’d paid all my tax and social security obligations. But in its effort to lift every rock and find cash to fund its welfare state, the Spanish government had discovered an unpaid fine. Criminals have statutes of limitations, and if they do their time, they can start over. Yet debt is personal and never-ending for the Spanish entrepreneur. There is no second chance. There is no limited liability.

I grew up a Jamaican immigrant in the Bronx. I graduated from Yale College magna cum laude and Phi Beta Kappa, and then from Yale Law School, where I was co-executive editor of the Yale Law Journal, got my first article published, clerked for the chief judge of the District of Columbia Circuit Court of Appeals and interviewed to be a Supreme Court clerk. I’m now a professor of entrepreneurial management and the director of the Venture Lab, the accelerator for entrepreneurial projects, at top-ranked IE Business School.

But that was all a piece of cake compared with being an entrepreneur in Spain. Spanish entrepreneurs are an endangered species. In a socialist economy, the entrepreneur–and the businessperson generally–is disdained as the embodiment of capitalist greed. Many students are taught that seeking personal enrichment is distasteful and very American.

Even if a budding entrepreneur somehow tunes out all of this noise, socialism’s realities may blare out her entrepreneurial aspirations. European venture capital is still an extremely risk-averse work-in-progress. In the third quarter of 2010, American venture capitalists invested $2.9 billion in 304 companies, while Europeans invested $847 million–less than 30% as much–in 161 companies, and only $34 million in the south of Europe. Personal bankruptcy is a legal fiction, so for the unsuccessful entrepreneur it’s one strike and you’re out. It is almost impossible to fire unproductive employees without paying generous severance packages, and that removes life-or-death liquidity from a young company.

Entrepreneurs may pay, as I did, hundreds of thousands of dollars in taxes and social security obligations, and they are often held liable for their failed company’s debts, but they don’t receive material unemployment benefits. If an entrepreneur does get back on her feet, the stigma of failure becomes a scarlet F, and so few success cases exist that the most brilliant Spanish minds rationally decide to work for large Spanish companies or the government rather than risk almost certain failure and a lifetime of debt and shame.

Some people debate whether entrepreneurs are born or made, but no matter what, they must be encouraged and guided. Business schools can help to create an ecosystem in which budding entrepreneurs network with real-world entrepreneurs, share experiences with a global cadre of fellow students and make mistakes without being relegated to a lower caste. Spain has three top-ranked business schools, but no top-ranked university (yet), because Spanish universities are mostly public and thus insulated from competition, whereas business schools must justify their existence to international students, recruiters and magazines that demand a global standard of excellence. Spanish business schools that attain global recognition can certainly help entrepreneurs overcome culturally imposed limitations that obstruct the creation of global brands.

Government can also play role, and it has a political incentive to do so, given studies showing that newly created companies are the primary drivers of job creation. As President Barack Obama recently learned, job creation is now voters’ No. 1 priority, and it is even more urgent in a country like Spain, with its 20.5% unemployment. Nonetheless, government’s primary role should be to stay out of the entrepreneur’s way. Precisely because the entrepreneurial journey is largely one of trial and error, the cost of initial failure should not be insurmountable if the goal is to create a viable, long-term entrepreneurial culture.

But the key to the whole process is the entrepreneur herself. Many entrepreneurs have Messiah complexes, meaning that even foreseeable crucifixion is not an effective deterrent. Despite my initial failure, I learned from my mistakes and started a multinational real estate search engine that has raised $4 million. And I’m not alone. Spain has seen a flurry of multimillion-dollar sales of startups created by expatriate Americans with international perspectives. Gustavo García Brusilovsky, a British- and American-trained Argentine in Spain, recently sold BuyVip, an online shopping club, to Amazon for $100 million. Similarly, the Spanish telecommunications giant Telefónica recently paid $100 million for Tuenti, a Spanish social network founded by Zaryn Dentzel, a laid-back Californian. Many of Spain’s most successful home-grown technology entrepreneurs, such as Jesús Encinar and Bernando Hernandez, have also studied and worked in the U.S.

Europe is eager to create its own Silicon Valley, and governments spend billions of taxpayer dollars on tech hubs that generate lots of press coverage, but such efforts will continue to fail until Europe learns to accept and normalize failure. Bankruptcy and tax laws that penalize entrepreneurial risk-taking and inevitable failure with life-long debt must be changed. Global vision that includes experiences outside of Europe’s borders must be encouraged. And failure, in its widest cultural sense, must be reconceived as part of the iterative process of trial and error that defines the entrepreneurial experience and is a necessary precursor to entrepreneurial success.

Gary Stewart joined IE Business School in February 2010 as managing director of its Venture Lab. He moved to Spain in 2001, and in 2005 he cofounded and served as chief executive of an Internet company that has since raised more than 3 million euros in financing.